I've been in tech for a long time, but I have recently started investing in websites as a pure asset class. I've done this for several reasons.
Most assets deliver anywhere between 7-15% per year depending on how successful the investor is and how much they focus on the investment.
The stock market has historically averaged 7% and bonds have done less.
Real estate, if actively managed, can return on the higher end of that scale due to favorable tax treatment and the benefits of mortgage debt.
I hear a lot about amazing returns in venture capital and private equity, but I don't have enough cash to get into those investments.
Which brings me to cash flow websites. These are assets that can now be purchased easily and whose returns are extremely attractive relative to the alternatives.
There has been a boom in digital entrepreneurship in the past 10 years as platforms have made it possible to create sizeable businesses online with little startup capital or even expertise required. These platforms include:
There has also been an explosion in the tools available to promote and market these businesses. This has made it possible to scale them immediately and at low cost using tools like:
The thing is that all this entrepreneurial activity, which is easily measured in the billions of dollars, has not translated into a liquid market for investors in these assets. We have not yet seen the securitization of these millions of online businesses into an easy to consume investment vehicle for the average investor. Not yet.
But these assets are large, extremely profitable, and available for multiples of revenue that would make Warren Buffet salivate. So even if they haven't been securitized, they are definitely ready for the average investor in the same way that rental properties are ready for the average investor.
Roughly speaking, solid online digital assets can be bought in 2019 for the following multiples of yearly cash flow:
These types of businesses, many of them with five or more years of history and profitability, can be bought via several brokerages (see my list at the end of this article)
Most investors have a very hard time finding assets that will throw off 30%+ per year in any asset class, as I said at the outset.
Of course, digital assets depreciate more quickly than physical ones do. But in the same way you need to hire a management company to manage your rental property, website operators can be found who will maintain and even grow your web business for 10-20% of revenue.
Why is it that investors haven't flooded this market yet?
Part of the answer is that they are beginning to, but not as quickly as you would expect. These types of returns can't last, of course. But here are some reasons why they might last longer than you'd think:
Each of these obstacles will diminish over time as markets become more liquid and service providers lower the friction to acquiring and maintaining these assets. Of course, those middlemen will also lower real returns, but there is a lot of room for that yet.
In my next post I'll talk about how I've tried to solve for some of these problems in my own case.
In the meantime, here are some places you can shop for cash-flowing websites:
Website Brokers I've worked with or used the below:
When startups in 2020 find product market fit they are under pressure to expand globally as quickly as possible. This is because digital markets are so efficient. Also, the loss of friction has turned many industries into winner-take-all competitions.
I've been doing international expansion work for 20 years. In that time some things have stayed the same and some have changed completely.
So how should hypergrowth businesses in 2020 think about going global?
Going Global - A Luxury Strategy Gone Mass Market
Until the year 2000 or so only Fortune 500 companies did global strategy well. Only they had the luxury of considering the entire world for geographic expansion. Global expansion was time consuming and expensive. It was also little understood for executive teams focused on domestic markets.
I started my career at a small consulting firm called William Kent International. It was a boutique consultancy that only did international expansion strategy. We competed with the tiny sliver of McKinsey, Bain, and so on who did pure globalization work.
It was a small corner of the management consulting industry but an exciting one.
International Strategy Then
On every engagement we would get to make long lists of geographic opportunities for our clients. Then we would start to think about whether, when and how to tackle them.
Each project began with desk research. That would feed into in-country field research. Most of the time this meant visiting lots of stores and distributors. Our goal was to find out how much stuff was being sold and by whom.
Sometimes - the most interesting times - it involved interviewing our clients’ competitors in the name of “market research.” It still amazes me that people were willing to talk to random Americans in suits. We would show up asking for dollars, units, and market share data. Often they’d print out internal documents and hand them to us.
At the end of these projects we would pull together all the data and prioritize that list. What had we learned in market? How big was the potential? How competitive was it? What were the barriers to entry?
On some projects we would visit twenty countries in our quest for the most optimal rollout plan. It was fun work. And it was expensive work, done by eager-beaver Ivy League grads at a markup of 5-6x.
The world, however, has changed. Much of what used to require on the ground and in person research can now be done in the desk phase. Even the execution can be managed remote with big impacts on efficiency, time to market, and scale.
International Strategy Today
Since 2000 the technology cost of launching a startup has fallen from millions to tens of thousands of dollars. Time to market is now measured in weeks rather than months or years. That compression applies when it comes to international expansion, too.
Startups today are able to go global in the same way that the multinationals of old did. They can do so at a fraction of the cost and at an order of magnitude of the speed.
International rollouts can happen instantaneously, as with mobile games. Or they can happen in rapid succession, as with mobility startups.
What has not changed is the process. Companies still have to evaluates their best options for global expansion. It is still important to go through the analytical exercise. That exercise includes figuring out where to deploy resources. It includes how to prioritize investments, and how to optimize for constraints. The process today includes steps similar to the ones from ten years ago, but it is faster.
I've outlined the steps below.
1) List the universe of options
Most of our consulting engagements began with a discovery phase. In that phase the client would introduce their business. Like all management consultants we would work hard to come up to speed quickly prior to that meeting. We would have developed some working hypotheses of our own.
At some point the client would always say something along the lines of “we’re not the experts in international strategy like you guys are, but we have some ideas…” Bingo.
The fact is that many businesses develop some amount of international activity fortuitously. Sometimes someone knew a distributor. Sometimes someone introduced the concept in a market early. Usually that early traction starts the conversation about expanding in the first place.
“We have some ideas…” was always a key point in the meeting. It was when we got to hear what countries or regions the management team already had in mind. They usually did, even if they were buying a global project.
In consulting when a client says “we want you to look at all the options, especially these options” you should pay attention.
Partly for the obvious reasons. But also partly because clients have implicit insight into their business. They know what it takes to succeed in a new market.
Asking questions and getting at the assumptions become inputs into the model. Assumptions that came up a lot included:
Later you will have a shortlist of markets. These assumptions will become an important filter.
2) Group the markets based on common segments
You can go with either a top down or bottom up sizing and prioritization exercise. In each case you need to understand the product market you are dealing with. You need this knowledge to compare across geographies.
That means you must at least understand the relevant market segmentation.
Understanding the product and buyer segments is usually the baseline to compare markets. For instance, a common mistake in the early 2000s was to think of China as a market of a billion people. In fact it was made up of a set of urban markets with certain traits. Separate from those was the rural market with a different set. Evaluating the China market size for most products required this understanding.
3) Estimate market sizes
There are a few tricks I’ve learned about doing market size estimates. They often remind me of Google interview questions.
In market sizing your goal is to get as close as possible to the real size. You do this by validating as many variables as possible in a basic size formula. The formulas are not complicated. But they make it possible to estimate almost unknowable numbers with confidence.
Here are some formulas we often used:
Bottom Up Estimates - numbers you can get from talking to producers, distributors and retail.
Top Down Estimates
There are more of these of course. The point is to use the data points you have access to. You can then come up with order-of-magnitude correct estimates of potential market size. Then research validates the assumptions and gets you closer to the real number.
Today it is almost trivial to find some combination of these data points online to say nothing of outright estimates of market size for a particular product or service.
5) Determine the difficulty of entry
It is possible that your market sizing exercise may yield a handful of huge markets that are easy to penetrate yourself with minimal effort.
That has generally not been my experience.
Things usually get hung up on "minimal effort."
There are usually tradeoffs between size, profitability, and ease of access. These tradeoffs affect an organization’s ability to deliver on the market potential. Usually the top candidates get filtered through a series of business criteria.
These can include:
None of this is an exact science. To be rigorous you should track all this information. But it is seldom that a spreadsheet kicks out an unexpected answer. In practice what happens is that the frontrunners become clearer through consideration. They represent a balance between size and executability.
6) Buy, build, or partner
There is another dimension that overlays size and executability. It is the availability of acquisition candidates or partners. These can speed up time to market or offset other drawbacks.
Buy or partner availability is idiosyncratic. Either there are good options in market or not. But if there are they can outweigh almost all other factors. Small regions often outperform their potential for a client “because our reseller there is just phenomenal.”
As with the sizing exercise, the key is in gathering the data. To know whether good partners are available you have to do the research for your shortlist of top markets.
7) Closing Thoughts
After doing this for a few years I realized that the real fun is to be had launching and running actual businesses. So I spent the following decade doing that. I spent many years rolling out teams in Southeast Asia, China, and Europe. The execution side of the analysis is something I’ll get to in a later post.